India’s Tax Man Knocks on Door of Cryptocurrency Exchanges; Seeks Identifying Information

India’s Income Tax Department, which falls under the Department of Revenue of the Ministry of Finance, began conducting surveys across the country on December 13, 2017. Investigators for the government agency visited nine exchanges spread out across Delhi, Bangalore, Hyderabad, Cochin and Gurgaon according to India’s Economic Times. The publication also said that these surveys were undertaken under Section 133A of the Income Tax Act, which is for the purpose of gathering evidence.

Tax authorities seeking identity information

Business Standard reported that the tax men visited exchanges with financial data and inputs already in their possession and wanted to know more about the workings of cryptocurrency exchanges in India. According to the Indian Express, Section 133 A related surveys can be used for:

“Gathering evidence for establishing the identity of investors and traders, transaction undertaken by them, identity of counterparties, related bank accounts used, among others.”

Indian Express also reported that these investigative teams were under the command of the Bangalore Investigation Wing.

Warnings were given

The Indian government has been rumbling about Bitcoin of late. We had reported as early as December 6, 2017 about how the Reserve Bank of India (RBI) had repeated its warnings on Virtual Currencies. It is important to mention here that the status of Bitcoin and other digital currencies is currently before the Indian Supreme Court.

The Reserve Bank, in its warning, had said:

“Attention of members of public is drawn to the Press Release issued by the Reserve Bank of India (RBI) on December 24, 2013, cautioning users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs. Vide press release dated February 1, 2017, RBI has also clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any VC. In the wake of significant spurt in the valuation of many VCs and rapid growth in Initial Coin Offerings (ICOs), RBI reiterates the concerns conveyed in the earlier press releases.”

Valuations triggered the raids?

Increased valuations seem to be the factor behind the tax authorities’ investigations. The Mint newspaper reported that Bitcoin has soared:

“17-fold this year as people rushed to buy the digital currency in the hope it will become an alternative to gold or traditional money.”

It would also appear from the warnings issued by RBI that valuations are certainly an important factor and the Indian government seems to want to know who is dabbling in cryptocurrencies.

Income tax raids an ominous sign

India’s income tax raids on Bitcoin are a worrying development for the future of cryptocurrencies and Blockchain in this country of over a billion people. Indian Income Tax authorities have a peremptory character and this sort of “raid” - as it’s known in the local vernacular - can have a severely dampening effect on the nascent crypto sector.

It remains to be seen what the motivations of these raids were and if the information that was obtained as a result of them will be used by the department to do a follow-up. However, it is becoming increasingly clear that India may not be the most crypto-friendly country. The only way this will change is if clear regulations are put in place by the authorities and an effort is made to understand the nature of this new financial technology by the powers that be.